As Of: June 22, 2001

Summer Doldrums

Predictable Random Volatility

    The recent volatility in the stock markets has been very frustrating for the optimists. However, for the bears in the crowd, this is a very normal period of "the turning of the tide". As we progress into the summer months, one can expect more backing and filling as money repositions itself and attitudes change. A recession is working its way through the system with continued earnings disappointments and additional layoffs. While the Federal Reserve tries to fight a slowing economy by lowering interest rates, its efforts have had little effect on a system that is soggy with debt. Over a longer period of time, lower interest rates will have some stimulative effect, but the benefits may be offset by renewed worries about inflation and the possibility of a softer dollar.

    There are currently two strategies that investors can pursue. 1) This is a trader's market. Volatility and uncertainty creates short term opportunities to scalp a few points here and there. 2) This is also a period of inefficient pricing which allows the long term investor to start building positions based on prospects two and three years out. This strategy requires confidence, patience, and caution because there will be days when long term positions will look like short term disasters. (Nobody can perfectly pick the bottom every time.) For the conservative investor, this is a reasonable period to stand aside. The upside potential (or lack thereof) does not justify the risk and the anguish that the average investor will suffer. We are in a bear market. Unless you are the kind of investor who shorts stocks, hedges with options and futures, or is a nimble trader, this is going to be a difficult summer.